With some fanfare, Environmental Protection Agency Administrator Scott Pruitt announced in October the end of the Clean Power Plan, an Obama-era regulation to lower greenhouse gas emissions by putting more restrictions on coal and supporting renewable energy.
In repealing the measure, Pruitt said the EPA overstepped its legal authority to force utilities to reduce carbon emissions. “The war on coal is over,” Pruitt said in his October press conference.
But in the month since the announcement, publicly traded coal companies have had mixed performances. Arch Coal (NYSE: ARCH), Cloud Peak Energy ( CLD) and Alliance Resource Partners ( ARLP) ticked up modestly but remain well off their 52-week highs. Peabody Energy Corp. ( BTU) is performing better than the rest, up slightly since the announcement and near its 52-week high.
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Meanwhile, the biggest U.S.-centric exchange-traded funds that invest in renewable energy, PowerShares WilderHill Clean Energy ETF ( PBW) and First Trust Nasdaq Clean Edge Green Energy Index Fund ( QCLN), are near 52-week highs. Additionally, solar company First Solar ( FSLR) changed little in value since the plan’s cancellation, remaining near recent 52-week highs.
It’s not surprising for policy changes to leave these investments largely unaffected, energy experts say, because policy has less influence than market forces, which hold that cheap natural gas is likely to continue to edge out coal. Utilities mostly use coal and natural gas to generate electricity, but with the advent of hydraulic fracturing, natural gas prices plummeted. The consensus forecast is they will stay low. What’s more, renewables are playing a greater role satisfying electricity demand, and as costs fall, they will continue to take market share, experts predict.
Economics dictate energy use. Natural gas is now the nation’s No. 1 source for generating U.S. electricity, at 33.8 percent, knocking coal to second place at 30.4 percent, according to the Department of Energy. The department notes all renewable energy sources — hydropower, wind, solar, biomass and geothermal — now constitute 14.9 percent of electricity use.
For years, electric utilities favored coal, the cheapest energy source, before natural gas became more affordable, a shift that’s unlikely to be reversed. “Withdrawing [from] the Clean Power Plan won’t clear the deck for new coal generation. The economics of natural gas and renewables are more favorable, now and in our future scenarios,” writes Stephen Munro, policy editor for Bloomberg New Energy Finance in New York, in an emailed commentary.
Stewart Glickman, energy equity analyst for CFRA in New York, says at best the withdrawal of the Clean Power Plan props up some of the coal companies that have existing plants. “The Clean Power Plan was sort of ushering the long-term demise of coal, and given how much natural gas we have in the country anyway, I think natural gas still wins out,” Glickman says. “In the near term, it’s probably not going to bring back a coal plant that was already shuttered, but maybe it prolongs the life of existing coal plants that are working.”
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The Clean Power Plan was expected to lower greenhouse gas emissions from the nation’s electricity sector by an estimated 32 percent below 2005 levels by 2030. But even without the plan, greenhouse gas emissions may fall anyway, given that prices for natural gas are cheaper than coal and renewable energy is becoming more competitive.
The momentum favors renewables. How utilities respond to the end of the Clean Power Plan depends on their mix of energy to produce electricity, Glickman says. Many utilities can choose from coal, natural gas, nuclear energy or renewables, but that too comes down to economics. Meanwhile, Munro says, “the retirement of aging coal plants, combined with the economics of natural gas and renewables, will continue to drive reductions of greenhouse gas emissions in the power sector.”
According to a research note, Morgan Stanley analysts expect more utilities to adopt renewable energy and shutter higher-cost fossil fuel plants as prices for renewables fall. Consequently, they prefer utilities that are adopting renewable energy faster, citing above-average earnings-per-share growth. The analysts overweight two California utilities, PG&E Corp. ( PCG) and Sempra Energy ( SRE), in their analysis, along with NextEra Energy ( NEE), North America’s largest renewable developer.
If a bigger policy push for coal had come four or five years ago, the energy scenario might be different, says Ian Simm, chief executive of Impax Asset Management Group in London. He says European policies at the time were essential to supporting the development of renewable power there, just as federal policies played a key role here. “But the situation moved on tremendously since then. So, in a way, the Clean Power Plan is sort of a second-order issue for investors looking at the power sector,” he says.
Equipment costs for renewables fell sharply because of Asian manufacturing, along with technological improvements, Simm says. This is significant as equipment costs can sometimes be as much as 85 percent of renewable energy’s total cost. “The dramatic drop in capital cost is the real game changer, and that’s been a global phenomenon,” he says. “U.S. consumers have benefited from cheap manufacturing prices coming out of Asia, as we have in Europe.” The absence of a plan may slow some growth areas for renewables, he says, but renewable energy growth has outstripped forecasts for the past several years.
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Munro says it would take more than just ending the Clean Power Plan to help coal. “If Pruitt intends to bring back coal, it will require some form of quota or mandate,” he says. “We don’t see traction for coal mandates in Congress or the regulatory bureaucracy.”
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Here’s Proof That Clean Power Is Here to Stay originally appeared on usnews.com
